• Kyodo News


The Bank of Japan is considering boosting its capital base by increasing the amount of its legal reserves as it prepares for losses it may incur from carrying out emergency measures to combat the global financial crisis, sources familiar with the matter said Sunday.

The Japanese central bank will consult with the Finance Ministry to begin its capital replenishment from the just-ended fiscal 2008, when its accounts settle in May, the sources said.

The BOJ aims to reinforce its financial standing and maintain credibility in the Japanese yen, since it risks incurring losses by purchasing risky assets like commercial paper and corporate bonds from financial institutions as part of its efforts to stem the financial turmoil.

As of the end of last September, the BOJ’s capital adequacy ratio stood at 7.54 percent, which is below the 8-12 percent level the central bank deems as financially sound. Its capital adequacy ratio is partially measured from the sum of its capital, legal reserves and provisions for possible losses from foreign exchange and securities transactions.

According to the Bank of Japan Act, the central bank is permitted to retain 5 percent of the surplus as legal reserves at the time of its account settlement. If the need arises, it can also increase the reserve amount and thereby reduce the portion of remaining surplus it pays to the national treasury.

While the BOJ will still iron out details with the Finance Ministry on the reserve amount and timing of the replenishment, it would be the first time in four years if the BOJ revises its 5 percent reserve ratio.

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